The Predatory Bank/The Public Bank

January 24, 2018 11:34 AM

“No banking policy could properly address the drive that motivates predatory lending: that those with capital seek to multiply it without laboring themselves. Aggressively capping interest rates doesn’t stop—to return to the words of Gautama Buddha—the “pursuit of gain with gain.” The only way to fully take the predation out of lending practices is to remove the profit motive from financial services altogether.” Shark And Hound, predatory lending and loan sharks in America from the Gold Rush to Payday loans, and a possible way out.

Additional Reading: The growing movement to create city-run banks - The Public Bank movement picks up steam - THE PEOPLE’S BANK LA

posted by The Whelk (45 comments total)

I literally just came from a presentation about the racial and geographic origins of wealth disparity where one of the metrics discussed was the utilization of payday lender services. The researcher was discussing data disaggregated by metro location and noted that boston and dc were hard to compare to other areas because they had effectively curtailed payday lending not by creating a public bank but simply by capping max interest allowable.

my contempt for these terrible business and the people who profit from them knows no bounds.
posted by Exceptional_Hubris at 11:46 AM on January 24, 2018 [18 favorites]

The Whelk, your posts as of late have been much a appreciated window into how the world could be. Thank you!
posted by Nonsteroidal Anti-Inflammatory Drug at 11:49 AM on January 24, 2018 [23 favorites]

America's just got such a ridiculous aversion to publicly run enterprises. It would help so many (basically all) Americans if we replaced Visa and other credit card processors with a fee-free government one. Under the guise of aiding commerce, it'd be a great boon to the American people. But no, instead we let a few companies eat a percentage of nearly every sale made at certain stores.

Public banks sound great, but some assholes are gonna find a way to sabotage them. :(
posted by explosion at 11:52 AM on January 24, 2018 [2 favorites]

As Charles Geisst argues in his book Loan Sharks: The Birth of Predatory Lending, the fairly straightforward ethical calculus of antiquity was, somewhere in history, replaced by one that works in favor of lenders instead of borrowers. “The old moral arguments about excessive interest lost that battle,” he writes, “because the fairness part was defeated by the notions that lenders must be compensated for the risks they incur and the market should decide how much that compensation should be. Usually, the ‘market’ has been what lenders say it is and they have gone mostly unchallenged.”

Yes, this. Neatly condenses an entire chapter of David Graeber's Debt: The First 5,000 Years, itself a phenomenal book on this very subject.
posted by Aya Hirano on the Astral Plane at 12:33 PM on January 24, 2018 [10 favorites]

Payday lending is almost by definition not a bank. A bank collects deposits. Anyone can lend money out. Regulators generally make funding loans like this with deposits uneconomic.
posted by JPD at 1:03 PM on January 24, 2018

they had effectively curtailed payday lending not by creating a public bank but simply by capping max interest allowable

The chink in this armor is that, for nationally-chartered banks, the applicable usury law is that of the state in which the bank is incorporated. If Chase decided to set up a payday lending arm, it would not be stopped by MA's usury law.

And the CFPB just dropped a case against a lender basically "renting" a Native American jurisdiction to argue immunity from all regulation.
posted by praemunire at 1:12 PM on January 24, 2018 [5 favorites]

And the reason why the regulator won't let them is because the default rates are high and recoveries are 0. Realistically there are two kinds of people who use payday lenders - people who don't understand the credit options available to them at a bank who have been lured in by marketing, and people who in aggregate are basically impossible to lend money to and expect to get that money back.

The first group are being done a disservice by regulation that allows predatory lenders to market to them, and the second group is being done a disservice by our lack of a social safety net.
posted by JPD at 1:16 PM on January 24, 2018 [15 favorites]

Putting a few of the worst corporate banking executive in hard prison just might have a small influence.
posted by sammyo at 1:17 PM on January 24, 2018 [9 favorites]

BTW you have to draw a distinction between a bank holding companies credit card operations and the deposit taking entity.

When people talk about these start up banks it's usually taking community deposits, and not competing with the bad parts of the big banks.
posted by JPD at 1:18 PM on January 24, 2018 [1 favorite]

Realistically there are two kinds of people who use payday lenders

There's a third type: people with emergency expenses that they could cover in a month but not a week. This falls under "needs better safety net," but isn't "horrible lending risk," just outside the scope that banks normally deal with - they want longer term arrangements that require more time to verify.

And sometimes, the lenders, knowing this category of people can payoff their loan relatively easily, work to make it more difficult: put strict payment requirements so they're likely to fall behind ("must be paid off M-F 10am - 2pm," rather than Saturdays after payday, or must get a validation stamp that the store may be lax about giving without a specific request), or pressuring them into accepting another loan immediately, so they can get more from them than the initial high interest payment - because the real money is in trading default debts, or seizing property from those debts.
posted by ErisLordFreedom at 1:25 PM on January 24, 2018 [7 favorites]

Debt collection is also heavily under regulated. It's the other side of the coin.
posted by Beholder at 1:26 PM on January 24, 2018 [4 favorites]

ELF - if you have property to secure the loan you shouldn't need a payday lender. That's a person who is underbanked.
posted by JPD at 1:34 PM on January 24, 2018

Im not educated enough in the specifics to tell you the difference between a bank and a lender or to understand the interstate regulatons as they may apply - I can only tell you what I heard and saw, which was an academic who studies wealth disparities showing me data that indicated that fewer people used payday lending services in DC and Boston than comparably at risk folks in at least 4 other jurisdictions, a difference which was attributed in the presentation to regulation of payday lenders in DC and Boston.
posted by Exceptional_Hubris at 1:44 PM on January 24, 2018 [2 favorites]

As a teenaged conservative, I opined that payday loan owners should be first up against the wall.

Honestly, it's the only political opinion I've found no reason to change.
posted by notsnot at 2:16 PM on January 24, 2018 [7 favorites]

I mean, even within the perverted logic of market morality, the unfettered predation of the poor or economically unstable leads to a distorted allocation of capital and resources. If you can make 40% turning a bunch of people with worse luck than you into serfs, of a sort, you’re sure as shit not going to invest in that new tech or widget factory that might make you 10%. (The same is true for the financialization of our economy in general, but that’s probably a whole other field of study.)

I mean, it’s fucking usury. Recognized as a terrible social ill almost everywhere, on a vast historical scale, because even if it weren’t horrifically immoral, it has really bad effects.

I just...guillotines. Festive guillotines for everyone.
posted by schadenfrau at 2:24 PM on January 24, 2018 [21 favorites]

In the absence of the government providing a compelling alternative, how can you really fault payday lenders for providing a service that people voluntarily use? Feel free to have disdain for the government as much as you like, but payday lenders are providing a service at a low price (commensurate with the risk attached). If payday lenders were actually lending money at interest rates significantly above their risk, another lender would step up to provide a more cost-effective solution and steal the market.

I mean, I fully support some sort of alternative for payday lending - but the people using the payday lenders obviously view it as better than the alternative of, say, getting evicted from their apartment.
posted by saeculorum at 2:32 PM on January 24, 2018 [2 favorites]

In the absence of the government providing a compelling alternative, how can you really fault payday lenders for providing a service that people voluntarily use?

While I was (and mostly am) violently against them, the situation is indeed complex.
posted by CheapB at 3:17 PM on January 24, 2018 [2 favorites]

In the absence of the government providing a compelling alternative, how can you really fault payday lenders for providing a service that people voluntarily use?

"In the absence of the government solving the problem, how can you blame them for pretending to solve the problem while screwing a bunch of people over?" Is that really your argument?

Feel free to have disdain for the government as much as you like, but payday lenders are providing a service at a low price (commensurate with the risk attached).

No, they're not. The interest rate they charge can be four figures. They're flourishing.

If payday lenders were actually lending money at interest rates significantly above their risk, another lender would step up to provide a more cost-effective solution and steal the market.

If the phone companies reaped large profits by providing terrible service at terrible prices, new phone companies would spring up to give consumers better deals.

If the airlines reaped large profits by providing terrible service at terrible prices, new airlines would spring up to give consumers better deals.

If the cable companies reaped large profits by providing terrible service at terrible prices, new cable companies would spring up to give consumers better deals.

I know someone told you that in capitalism competition will naturally emerge to drive prices down and improve quality of product, but it turns out that in real life it's rarely that simple. For instance: it so happens that if the sellers can informally or implicitly agree to maintain prices that allow for high profits rather than giving away that margin by competing on price, they very often will!

data that indicated that fewer people used payday lending services in DC and Boston than comparably at risk folks in at least 4 other jurisdictions, a difference which was attributed in the presentation to regulation of payday lenders in DC and Boston

This is true, at least for MA. Most payday lenders do not attempt to operate in MA, because of the law and the willingness to enforce it.
posted by praemunire at 3:37 PM on January 24, 2018 [24 favorites]

"In the absence of the government solving the problem, how can you blame them for pretending to solve the problem while screwing a bunch of people over?" Is that really your argument?

No, my argument is that they have to be screwing people over less than having no option at all. I don't think poor people are stupid - given the choices of "get some money now at an exorbitant interest rate and maybe I can avoid eviction this week" and "well, I guess I'll just have to get evicted this week", I can understand why people take the option of payday loans. Again, I would prefer a better option for them to exist - but so far as I can tell, none exist.

I know someone told you that in capitalism competition will naturally emerge to drive prices down

You give good examples. However, so far as I can tell, opening a payday loan company requires fairly low capital, given how many I've seen of them pop up. I don't see any reason payday loan companies are a natural monopoly or naturally collude. Is there? Lest evidence suggesting there is collusion between payday loan companies, I have to assume there isn't.
posted by saeculorum at 3:46 PM on January 24, 2018 [1 favorite]

Feel free to have disdain for the government as much as you like, but payday lenders are providing a service at a low price (commensurate with the risk attached).

I am also not an expert on this stuff, but I find this morbidly amusing. Like, you do realize that charging extortionate, compounding interest and encouraging people to re-borrow to pay it off, radiacally increases the risk of default, yes?

Maybe payday lending really isn't a high-profit business (tiny violins, etc.); maybe that has less to do with inherent risk and more to do with the fact that it's a fucked-up business model that destroys the value of its best clients.
posted by klanawa at 3:47 PM on January 24, 2018 [9 favorites]

In the U.S., at the moment, only one public bank exists: The Bank of North Dakota. “The whole idea of the Bank of North Dakota, when it was set up in 1919, was to keep North Dakota money in North Dakota for North Dakotans,” says Ellen Brown, an attorney and founder of the nonprofit Public Banking Institute.

Why send your local money off to Wall Street, or elsewhere around the world, when you get nothing (much, if anything) in return? One example – as Michael Shuman writes in The Local Economy Solution (2016) – even if credit cards nominally are issued by local banks, they're run through national networks that skim every local transaction for global financial conglomerates.

Reading about their public bank over the last few years, I couldn't figure out why ND – almost 100 years ago – figured this out, rather than any of the other 49. George Lakey, in Viking Economics (2016), thinks ND might handle money better because it's the “state with the largest population of Norwegian Americans." More recently, growing rich from oil revenues, North Dakotans "knew from Norway’s experience that it is possible to gain public revenue from the oil and at the same time avoid dependency on that source. It therefore created what it calls a Legacy Fund for use in the longer run. Boom-and-bust has little allure when a population... knows that a much better alternative exists.”
posted by LeLiLo at 4:02 PM on January 24, 2018

Like, you do realize that charging extortionate, compounding interest and encouraging people to re-borrow to pay it off, radiacally increases the risk of default, yes?

I don't think we should stop people from borrowing money if they need it. I think we should find ways to make that borrowing impact them as little as possible. If there is no other way to borrow money for a short period (which is true for many people right now), I'd rather have them be able to borrow from a payday lender and maybe default on the loan then not be able to borrow anything and definitely be evicted, have their water shut off, etc.
posted by saeculorum at 4:19 PM on January 24, 2018

If payday lenders were actually lending money at interest rates significantly above their risk, another lender would step up to provide a more cost-effective solution and steal the market.

This puts me in mind of the story about the famous economist, out for a walk with his young daughter. Suddenly she began pulling on his sleeve. She pointed to the gutter and said "Daddy, look! There's a twenty dollar bill on the ground!" The economist didn't even glance over; he simply strode on saying "Don't be ridiculous, my dear. If there were really money lying in the street, someone would have picked it up already."
posted by nickmark at 4:45 PM on January 24, 2018 [14 favorites]

I don't think we should stop people from borrowing money if they need it. I think we should find ways to make that borrowing impact them as little as possible.

That's exactly what the article is addressing, so we're on the same page there.

If there is no other way to borrow money for a short period (which is true for many people right now), I'd rather have them be able to borrow from a payday lender and maybe default on the loan then not be able to borrow anything and definitely be evicted, have their water shut off, etc.

But this is just one either/or scenario; the article offers other alternatives that currently exist, and that work. What it's proposing is that these alternatives extend nationwide.
posted by Aya Hirano on the Astral Plane at 5:10 PM on January 24, 2018 [3 favorites]

Maybe payday lending really isn't a high-profit business (tiny violins, etc.)

Don't kid yourself.

maybe that has less to do with inherent risk and more to do with the fact that it's a fucked-up business model that destroys the value of its best clients.

On that, we agree.

By the mid-2000s, Locke claims he was clearing around $1 million a year in profits. He began collecting watches, including a Cartier, and also vintage motorcycles. His fleet of cars included a pair of Range Rovers, a Cadillac Escalade, a Lexus, a BMW, and a Mercedes. ... “I felt like a modern-day gangster,” Locke said.
...
“The cycle of debt is what makes these stores so profitable,” he said.
...
“I’ve had lots of customers go bankrupt,” Locke said —“hundreds” just at the two stores that he ran without a partner.
...
“I ruined a lot of lives,” Locke said. “I know I made life harder for a lot of my customers.”

The Intercept, Money For Nothing: Confessions of a Payday Lender which I could swear I originally saw linked here on the Blue but I couldn't find the thread on a quick search.
posted by nickmark at 5:12 PM on January 24, 2018 [11 favorites]

In the absence of the government providing a compelling alternative, how can you really fault payday lenders for providing a service that people voluntarily use?

in the absence of the government providing a compelling alternative, how can you really fault fentanyl dealers for providing a service that people voluntary use?

in the absence of the government providing a compelling alternative, how can you really fault hit men for providing a service that people voluntary use?

in the absence of the government providing a compelling alternative, how can you really fault neo nazi trolls for providing a service that people voluntary use?

hey, i can justify ANYTHING with this sort of argument, can't i?
posted by pyramid termite at 5:46 PM on January 24, 2018 [13 favorites]

If there is no other way to borrow money for a short period (which is true for many people right now), I'd rather have them be able to borrow from a payday lender and maybe default on the loan then not be able to borrow anything and definitely be evicted, have their water shut off, etc.

I think the real issue is that what happens is that they start in the position of being out of money, borrow from a payday lender, have even LESS money the next month, lather rinse repeat until default. So now they are bled dry, have trashed credit, and STILL definitely get evicted, have their water shut off, etc.

The situation is made strictly worse by the presence of the payday lender.
posted by notoriety public at 5:52 PM on January 24, 2018 [8 favorites]

That thread's here, nickmark.
posted by axiom at 5:53 PM on January 24, 2018 [2 favorites]

Thanks! How on Earth did I miss that?
posted by nickmark at 5:58 PM on January 24, 2018

Previously, the Postal Bank.
posted by Marky at 6:38 PM on January 24, 2018 [2 favorites]

It would help so many (basically all) Americans if we replaced Visa and other credit card processors with a fee-free government one.

Australia's just about to launch a universal instant payment system, like PayPal but not terrible, and linked to a bank account. This is really only possible because a government entity corralled private entities into agreeing to fund and implement it.

The free market is good for several things, but it's a disaster when it comes to infrastructure.
posted by Merus at 7:10 PM on January 24, 2018 [9 favorites]

if you have property to secure the loan you shouldn't need a payday lender

Payday lender will loan money out today, for a bill that's due in four days, and let you pay it back in a week and a half when your paycheck comes. A bank won't loan you $300, with $350 due in a week and a half.

Theoretically, if you have property, you should have had no trouble getting a credit card that would let you do that instead (at a much better interest rate), or even a debit card that allows you to over-withdraw for a fee, but having property doesn't mean you have that credit already. (Maybe you got married last year, and now you own property, but you haven't gotten a credit card.) Banks aren't designed for short-term cover-your-bills loans - aside from the high risk of default, they expect people who need a few dozen to a few hundred dollars to use credit cards, not loans.

I just went looking for articles about "I pay my card off in full every month and they cancelled it," but I couldn't find the ones I've seen before. But wow did I get sucked into a mess of articles about horrific credit card practices.
posted by ErisLordFreedom at 7:53 PM on January 24, 2018 [1 favorite]

A bank won't loan you $300, with $350 due in a week and a half.

Also relevant:

Why don't payday lenders rule the world?

I haven't done a bank loan in ages but I assume there's still a $20 or $25 processing fee that is negligible relative to the interest rate if you are thinking "$10,000 for three years to buy a car" and huge otherwise. If you need a small short term loan and can't afford a long term one, the relatively small labor costs loom large.

A public bank has some good things going for it, but it won't provide access to cash for people who can't manage a credit card.

(I will add: I tried peer-to-peer loaning with a bit of money and then a few months later realized that most of my investment was going to loan consolidation attempts at ridiculous interest rates by people who default at high rates after a few payments. That is, I had become a predatory lender. I felt guilty and stopped, but I will say (1) me stopping didn't help anyone desperate for a loan to avoid bankruptcy, and (2) I certainly wasn't making that much money net, despite the exorbitant nominal interest rates.)
posted by mark k at 8:10 PM on January 24, 2018 [2 favorites]

@Merus: I would love to see a link for that Australian system you describe. That sounds great.
posted by ephemerae at 8:34 PM on January 24, 2018 [2 favorites]

hey, i can justify ANYTHING with this sort of argument, can't i?

Please... can you not concede that your examples are not the tiniest bit flawed?

Ridiculous interest rates suck badly, without a doubt. But I have yet to hear of a realistic alternative to the payday lender. Banks, even public banks, and payday lenders don't overlap services a whole lot. The services are utilized for reasons that make sense to those who use them, when they need them. Payday lenders make no sense for me, thank dog, but if I were in a situation where they did, I'm not sure I would be better off without their availability.

If payday lenders offend your morals, good for you. The country is full of people more than willing to legislate their morals. The question is, do your morals make my life better? What if my life simply refuses to fall into line with your moral order? Can I not have another alternative available, even if it's a shitty alternative by your measure?

Small, short term loans tend to be inherently costly and risky. People are not as stupid as you might think they are. They use these loans because the alternatives are worse. If they even exist at all.
posted by 2N2222 at 8:59 PM on January 24, 2018 [1 favorite]

The Australian system is not the only one, Denmark has had Mobilpay for some years and others exist I believe. In most first world countries you have been able to transfer money to other individuals, at other banks even, for free via net banking for years. The US is way behind.
posted by deadwax at 10:58 PM on January 24, 2018 [1 favorite]

But I have yet to hear of a realistic alternative to the payday lender.

google microlenders - and realize that just because something hasn't been done in the u s, doesn't mean it's impossible or unworkable

The country is full of people more than willing to legislate their morals. The question is, do your morals make my life better? What if my life simply refuses to fall into line with your moral order? Can I not have another alternative available, even if it's a shitty alternative by your measure?

you do understand that someone's moral order is going to rule society, don't you? no moral order is still a moral order - if you want to live in a society, one of the costs is that the people in it, including you, have to make compromises on morals
posted by pyramid termite at 2:15 AM on January 25, 2018 [2 favorites]

microlenders - and realize that just because something hasn't been done in the u s, doesn't mean it's impossible or unworkable


I wouldn't conflate microlending with payday lending. Most microcredit is functionally working capital lending to small vendors (and is usually pretty expensive as well) and not personal unsecured lending. Also the vetting process is probably longer than for a traditional bank loan in the US.

Actually the EM/Microcredit equivalent of payday lending is pretty damn usurious as well, and when I ask the banks who do it why it still exists (because its way too profitable, and actually more profitable than payday lending because it can take more leverage on the capital base) they just kind of shrug.
posted by JPD at 5:25 AM on January 25, 2018

If you ask me, microlending is more evil than payday loans, not less. I mean, at least the payday loan people don't wrap up their usury in neoliberal propaganda about "teaching responsibility" and "building relationships with local financial institutions".
posted by tobascodagama at 5:35 AM on January 25, 2018

In my link a couple posts ago, the Daniel Davies wrote: I think that this is why "microfinance" was a silly idea too, btw, and note that almost everything carried out under that name today is just perfectly straightforward banking in the Third World. Lending to a farmer to buy a tractor is a fine thing to do, but it isn't microfinance.

This was a claim 10 years ago. How true was this then and is it now? I'm not sure.

Kiva's average loan size is $400, which in the context of India or Bangladesh per capita GDP is way more than a microloan but obviously less than a tractor. Their web site listing highlighted opportunities are in the $1k to $5k range, though that may be an artifact of what attracts donors.

Per WIkipedia Kiva loans (1) charge higher interest rates than a traiditional banking sector loan, but (2) pay zero percent interest to the lender. So: no profit motive, lenders w/ charitable goals, access to free capital, and still high interest rates. Certainly there are things going on with the lousy terms small loans beyond just exploiting poor people.
posted by mark k at 7:41 AM on January 25, 2018 [2 favorites]

What D^2 means is that most microcredit takes the form of funding inventory for small wet market sellers. Precisely the kind of activity that is classic banking. I don't know much about Kiva, but Bank Rakyat Indonesia is about the most profitable bank in the world and it's most profitable business is running the biggest microcredit business.
posted by JPD at 8:09 AM on January 25, 2018

Previously, the Postal Bank.

When I get my turn at being Benevolent Dictator of the World, I'm turning the USPS into America's Company Store^TM. One stop shopping for:

• Banking, including money transfers and P2P payment products
• Public Key Cryptography keys/hardware/IDs, which will replace nonsense like Social Security numbers for authentication
• Email (on its face wouldn't be any worse for privacy that what PRISM/Gmail/Microsoft already do, but hey, I'm the BDotW, so we'll throw protections against warrantless search in for free)
• Tax payment, except the IRS calculated most everything for you, so just hit OK on your phone using your Public Key ID
• Login.gov password resets
• Like, anything else you need a government service center for. And they get enough funding so it'd have a great level of service while still maintaining those cliched DMV employee protections [Self-link to a Politics thread comment].

This would be so easy, because the Post Office is already handling passports and revenue/tax stamps, I'd just throw a little more money their way. It's like how people talk about Amazon buying Whole Foods so that they can have a physical presence now, I want the Post Office to be the brick-and-morter service center of the US.
posted by Nonsteroidal Anti-Inflammatory Drug at 10:30 AM on January 25, 2018 [4 favorites]

MetaFilter: Festive guillotines for everyone!
posted by BlueHorse at 8:22 PM on January 25, 2018 [1 favorite]

Bank of America Just Reminded Us of Why We Need Postal Banking

There’s been a long-running conversation about whether the United States should bring back the sort of postal banking system common across much the rest of the world, and that the U.S. had up until the mid 20th century. The U.S. Post Office could offer basic financial services, including bank accounts, to needier customers who aren’t being served today.

Though it may seem a tad far-fetched in the anti-government Trump era, this is not an idea that only journalists or academics have been interested in. The post office’s inspector general released an entire report exploring the concept in 2015, and Sen. Elizabeth Warren has been a vocal supporter of it. As Baradaran said to me, Bank of America and its ilk are “not even pretending” to care about the sort of people for whom $12 a month is too much to pay for a checking account. It’s time for the government to take those customers off their hands.

posted by kliuless at 10:23 PM on January 25, 2018 [3 favorites]

State treasurer, attorney general team up to explore creating California pot bank; @interfluidity sez: "There are lots of reasons why US states might want to run their own banks like only North Dakota currently does. It's risky, and would represent a significant shift of power from the Federal govt to states. But Federal marijuana prohibition might force it."
posted by kliuless at 8:53 PM on January 31, 2018 [1 favorite]